Defined benefit pensions impacting businesses

It would take over one year to repay the defined benefit (DB) pension scheme deficit using all cash generated from day-to-day operations for 29 firms in the FTSE350, according to research by Barnett Waddingham.

The study found that over 49 FTSE350 businesses have DB pension deficit contributions that exceed their free cash flow. DB deficit contributions represent on average 1.1% of total revenue of firms in the index.

The research also found:

For 75 firms, annual DB deficit contributions were higher that those being paid in respect of pension benefits being earned each year.

78 organisations in the FTSE350 could have funded a buy-out if their pension scheme at the end of 2011 using their cash holdings.

Nick Griggs, head of corporate consulting at Barnett Waddingham, says: “Despite the significant level of contributions, DB scheme deficits remain a concerning issue. Many companies continue to take a longer term view on the funding and investment strategy for their DB scheme. This is evidenced by the investment risk being taken and the number of companies that have increased their cash holdings to a level which might allow them to realistically consider a full scheme buy-out, which so far they have chosen not to do.”